■ 02 October 2008 | 8:12 AM
Wealth through credit
America has reached the limit of credit, as individuals, corporately and as a nation. Wealth can no longer be artificially created by credit.
Historically, you could borrow about three times what you earned. Of this, about 75 percent would be for a mortgage, the remaining 25 percent in short-term debt, credit cards, car loans. At this level of borrowing, homes could increase in value at a rate of wage increases, 5 percent per year on average.
Early methods of expanding "wealth through credit" were the car lease and credit card mailings to everyone. Short-term debt per family doubled or tripled. This set the stage for the subprime mortgage and led to more buyers than homes and a 25 percent increase in home values.
However, it was not sustainable, as incomes could not support the loans, and "wealth through credit" by bad home loans began to shrink.
A return to an amount of credit people can pay for will create a recession, which is simply the companion to the rapid but false increase in wealth.
The bailout is an effort to preserve the false wealth through credit and, in the long run, I think it will fail.
Daniel R. Warman
Norfolk
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Off topic, too!
Thanks, Gabrielle! I am feeling pretty fine considering what I have just been through these past five months. Cheers, Mary
Off Topic
Sorry folks, but I just have to tel Mary her post brought a smile to my face. Congratulations on finishing with you chemo. Best of luck to you in returning to good health!
Thanks, Ira!
I think I'll be able to handle that from now on. I always forget to check what "right click" does!!! Cheers, MGM (with too much chemo brain, but finished chemo two days ago!!!)
mary
Just highlight and then right click-->then click copy.
Go to the box in which you leave your psot and right clicn and then click paste.
Hope that helps.
Boston Globe and Barney Frank
I was aghast this morning to find a link from a very conservative group to a couple of Boston Globe articles on Barney Frank and his longterm boyfriend who was one of the honchos heading up Fannie Mae. I am not one of you excellent "linkers" to be able to import the link, but it should be possible to jump to the Boston Globe or Google and read the article. Now Barney Frank is being looked to as a pillar to help clear up the mess. Doesn't sound right to me. Cheers, MGM
Get over it
Let me give you an example of how this works.
I bought a large amount of Worldcom stock after they anounced their woes. The stock dived and I bought it up. Just as had happened w/ K-Mart, news reports created an upswing doubling my money overnight. It only took pennies as it was on the Pinksheets. I waited a day too long and lost my butt.
I took this chance in hopes of getting a large return and I failed. This is what the FM's and AIG's investment arm did.
Why would we bail out poor investing and obvious corruption at the FM's. We already know FM was corrupt and it was published and heads rolled just a few years ago. Sadly, the biggest head (Raines) rolled right onto Obama's campaign.
House values is distinct
I don’t think it’s intellectually sound to try and compare the market value of homes to stuff like gold, simply because their both flexible. I mean, a ballerina and silly putty are both flexible, but one is certainly much more complex and than the other. What’s more, the value of a mortgage directly effects the availability of money for lending, which then re-effects the value of the mortgage, and on and on… I don’t think any other commodity is capable of this cyclic downward spiral.
Which true value?
We are not talking about the actual house value, we are talking about the value of the mortgage.
The mortgage is secured by the value of the house, but that only comes into play if the house is foreclosed.
So, if a borrower with a good job owes $500K on a home he bought for $600K but the market value of the home falls to $400K after the price bubble burst, what is the real value of the mortgage?
If he continues paying on time till the balance is paid in full, the mortgage is worth $500K plus interest. If he defaults it is only worth $400K plus whatever other assets the borrower has which can be seized.
So long as he is not in default, the former value is true, only if he defaults is the second value relevant.
True value
Other assets, gold, silver, stocks, bonds, money, etc. are valued by their worth on a given day. Why should home values be any different? To remove this requirement is to again try to hide the true facts of the matter. At what point would you say it is prudent to acknowledge the true value of an asset? On the hope that one day the home value may increase is wishing on a star. We know not what the future may bring!
What financial model are you using?
The problem is that the “value” of many of these mortgages have fallen, and banks are required by the mark-to-market accounting rule to write-down their assets. The “regulations” everyone claims have disappeared require that they maintain a certain balance between what they have and what they can lend, so when they devalue their assets, even though they will undoubtedly be worth more later, they reach a point where lending is restricted, not by actual losses, but by the unavoidable flux in the housing market (a market ironically pushed further when lending is restricted, restricting lending further, and so on). While this is real loss, it’s not the same as if the money went out the door, never to return. Unfortunately, this limit restricts the flow of lending, which is what the government plan is trying to avoid. By any definition, however, this is NOT “false wealth,” and people like you are part of the real problem – a “false” restriction on lending that will be the real killer for most Americans.